Dylan Corporation issues a zero coupon bond with $100,000 face value, with a 5-year maturity, and the market rate is 7%. Interest on corporate bonds is normally paid semiannually. In the liability section of Dylan's balance sheet, the proceeds from selling the zero-coupon immediately after issuance will be closest to:
A)$70,892.
B)$71,299.
C)$70,000.
D)$100,000.

Question

Quizplus · Accepted Answer

The proceeds from selling a zero-coupon bond are calculated by discounting the face value back to the present value using the market interest rate. Since the bond is a zero-coupon bond, it pays no interest and its value is solely based on the present value of its face value at maturity. The formula to calculate the present value is: PV = FV / (1 + r/n)^(nt), where PV is the present value, FV is the face value ($100,000), r is the annual market rate (7% or 0.07), n is the number of compounding periods per year (2 for semiannual), and t is the time in years (5). Plugging in the values: PV = $100,000 / (1 + 0.07/2)^(2*5) = $100,000 / (1.035)^10 ≈ $70,892.

Dylan Corporation Issues a Zero Coupon Bond with $100,000 Face